Charlie McIlvaine:
Thank you very much for having me.

Chris Blasinsky:
We’ve leaned on you the last several years to bring the State of the Industry numbers to the stage at our State of the Industry Summit, which happened to be the first live one we had this year in three years. You’ve immersed yourself in this data and know pretty much more than Jeff and I do combined about this data. Coming out of a pandemic, we looked at the numbers a little differently. This year we looked at 2019 and 2020 and 2021 because 2020 was the wacky COVID year. We had a three-year comparison, which we don’t normally do. What are some of the things that as we were pulling the data together that you sat back and looked at and just went, wow, okay. That’s surprising.

Charlie McIlvaine:
It’s a good question. I feel a little guilty trying to put in perspective what appears to be prima facie, kind of this strong economic result in 2021. I don’t mean to sound like ‘Debbie Downer,’ but I think that there’s a little bit of be careful on this because a lot of what happened inside the store and certainly what happened outside on the forecourt was circumstantial. It was circumstantial in the first instance of inflation, driven in part by labor. We can talk about that downstream because what we saw is people absolutely had to raise prices to cover costs. So it’s not like we had record inside stores because we had phenomenal unit growth. We actually had inflationary growth.

Charlie McIlvaine:
And secondly, on the fuel gallons, when you compare anything to 2020, you’re great on a percentage basis. So that’s why we actually focused a lot in 2019 for a comparative base to 2021. And when we did that, the two things that stand out, which again I think are big watch outs, are that transactions were down 6.9% and fuel gallons were down 7.2% in 2021 versus 2019. So the top line is just that, it’s the top line. We need to go down through what happened to profitability and look at the unit behavior to get the right full picture. That to me is an important kind of standout for this year’s data set.

Jeff Lenard:
When we look at how we’ve defined numbers over the years, originally the key was we focused on the rollup numbers. Like our industry had X billion dollars in sales. The whole point was we were still trying to elevate our industry’s reputation and that was still important. And we overcame that hurdle. So now the State of the Industry numbers look at benchmarking, they look at how we performing by quartile, by region, by all these different cuts. And while we do look at that big rollup number just for context, what the numbers really look at is how are you performing against those who are in the industry who are submitting numbers, and how are they doing?

Jeff Lenard:
So it’s really more of a benchmark against some of the higher performers and it’s really an accurate representation. If you are in the industry and you want to grow, this is who you are going to have to measure yourself against. I think that’s where the real evolution in the State of the Industry has gone. Now, when you look at those numbers, Charlie, are there any of specific numbers in benchmarking that you look to call out and say how come we aren’t at this level on this number, or how come we aren’t doing better on this number?

Charlie McIlvaine:
A couple things on that. First, there are 148,000 convenience stores in the United States. In terms of outlets, it’s huge. As a channel of trade, it’s enormous. 90% of America is within 10 minutes of a convenience store. That is a retail kind of industry benchmark that people would love to have that. The third is there’s 165 million transactions a day in convenience, which means every two days on average, all of America goes in a convenience store. And lastly, we were the relevant industry. We were the industry that was opened throughout all this pandemic. 14% of restaurants closed their doors, which is 100,000 restaurants.

Charlie McIlvaine:
We in convenience, we were an essential business. Not because it’s a label that sounded pretty from whatever standpoint, but it’s true. So I think relevance is cemented. The part of your point was with that relevance and with that established feature, what’s going on within the industry. Historically, we about 160 submissions. It is a fairly large sample set of firms, which represents [tens of] thousands of stores.

Charlie McIlvaine:
So it’s a relevant sample set. Could we want more? Sure, we’d love more, but what we have we need to take as being appropriate. And I think that’s a fair starting point for demarcation. Historically, what we used to do is slice these up into quartiles. And I think it made sense perhaps at one point in time to look at it through those buckets. What we did this year, and it was a standout, is we sliced them in deciles. Instead of taking four buckets, we looked at 10 buckets and we walked through what they looked like by bucket and some of the lessons were pretty revealing because I think what ‘good’ looks like is one of the most important things that anybody should do, whether you’re in business in a retail context or you’re in business in some other context, is what good look likes.

Charlie McIlvaine:
What does good look like? Where are you relative to that? So in the decile approach, we found that the top, the very top of all the 10 buckets, earned 1.7 times as much store operating profit as the next ninth decile. So when we get up to 6, 7, 8, 9, 10, there becomes this big jump for the 10th decile. It’s 1.7 times the next guy. That is distinctive because that just shows you there’s a real big bust out. And then when we looked at inside store profitability among the deciles, only the top four are making money inside the store. When we tried to look further into the other aspects of the P&L the top decile on order of magnitude is 3.0-plus times on almost every line item to the bottom decile, be it either gross profit dollars, merchandise, gross profit dollars, foodservice gross profit dollars, et cetera. And they’re less than that by 1.5 times wages and benefits and card fees, et cetera. So their direct store operating expense is 1.6 times the bottom decile, but their top line or their gross profit is 3.2 times. That just shows you what operating leverage does for this business.

Jeff Lenard:
For anybody who was casually listening, I want to bring up that point you said earlier: only the top 40% of operators are making money if they only look at in-store operations. And if you don’t have fuel as part of that, you are not making money.

Charlie McIlvaine:
That’s right. That’s what the data said, and when you cut into deciles it’s revealing.

Jeff Lenard:
When you started out in the beginning talking about ‘I don’t want to be a Debbie downer,’ that’s not necessarily being a Debbie downer. That’s just saying let’s not have a balloon drop looking at these numbers. Let’s instead look at how these numbers make us better, because everybody wants to. Everybody wants to advance convenience and everyone is selling largely the same products we are. So how do you continue to get better so you can stay ahead of all this competition?

Charlie McIlvaine:
That’s true. I guess the question should be you’re giving me these broad stroke numbers, sales or gross profit dollars or whatever. What’s the real driver behind it? And this is not mysterious, but foodservice is a really big one. The top decile does a very good job, very credible job on foodservice. I would add circling back to industry relevance when 100,000 restaurants have shut, where do you think these people are going for food? And I’d say, as an industry, we are growing in our foodservice relevance to the consumer choice set. If we can continue that experience with our guests, I think that that allows our guests to sort of normalize that they can get a high-quality experience there. And the truth is these top decile operators and food, it’s actually really good quality.

Chris Blasinsky:
Jeff already dated us with our tenure at NACS, but my first State of the Industry Summit, I’m pretty sure the only two operators anyone was mentioning in the foodservice space were Sheetz and Wawa. Foodservice, whatever the program maybe because it is very broad, sometimes it can also be a little hard to calculate. Foodservice is growing but at the same time it’s a little tough too because it’s not a one-size-fits-all by any means. It’s become from what I’ve seen the differentiator, not only for our industry, but from different convenience stores within their markets.

Charlie McIlvaine:
During a visit from Henry Armour [NACS president and CEO] to our office, we had a roundtable discussion and we spent a lot of time just back and forth fluidly on topics. I think one of the important roles that NACS can play, and we’re talking about what good looks like, and we’re using numbers from submissions and we’re trying to slice and dice data, we’re trying to say that this is a version of what good looks like. But one of the great things about NACS and it’s points of connection to so many different operators is to take the pieces of those different operators and weave that string of pearls into a thematic or into comparisons. Henry does that like no other because he’s on the road constantly. And where I’m going with this is that he meets with all kinds of members from single to multi-site operators, from those with a big international exposure or even strictly international presence to large regionals to multi-state, multiregional United States players.

Charlie McIlvaine:
And I think one of the things that came out of this discussion, which it seems a little bit simplistic, but is 80% of our customers are repeat generally. 25 percent-plus convert from the forecourt getting fueled coming into the store. These are broad stroke terms. And the third thing is that a lot of people are coming to these locations for connectivity, for that human element. I know we’re trying to automate, I know we’re trying to save on the costs of technology, but people still get energy from people. The last thing he said is that if we have these site chains that have 700-900 stores and are in six to eight states, it’s a lot of distance between that and the other guys.

Charlie McIlvaine:
But it’s for the other guys to stand for something and to be good at something and leverage that customer relationship to be reinforcing and creating that consumer pool demand. I think being good at the local or even regional level makes a really big impact on people’s psyche and throws it in the frontal lobe as to why and how they choose to go to someplace for their needs. I thought that was relevant for us all to think about this isn’t a black box.

Jeff Lenard:
When we look at convenience, and we’ve looked at the trends and we’ve looked at deciles and breakdowns like that, are there any things that jumped out at you that said this wasn’t pandemic related in terms of a temporary blip, but this is something that we need to pay attention to beyond foodservice that will be part of our operations, or maybe shouldn’t be part of our operations?

Charlie McIlvaine:
We looked at basket analyses this year, which we hadn’t in the past, and we looked at it 2021, 2020 and 2019 and we looked at it compared to the top decile. That’s a lot going on in a slide, but I can remember the specific slide that I’m referring to, where we looked at the basket value. So what’s the dollar value of what people come into a store and they buy, add it up. That has gone from $6.20 cents in 2019 to $7.59 cents in 2021. That’s a pretty big increase. And along that journey of $6.20 to $7.59 basket value, a lot of that had to do with units too, because people were buying more in their stops. Said a bit differently, they were making fewer shopping trips and buying more at those shopping trips. And the pandemic did force that. And maybe it created a little bit of behavioral change, but what is also beginning to happen is that those units are starting to flatten or even decrease as inflation starts hitting us.

Charlie McIlvaine:
And so we’re coming into a zone of price elasticity, which means that at some point, when you raise the price, the demand’s going to fall off because people are going to say I just can’t spend that much money on it. So that that’s one point. The second point is that we looked at our direct store operating expenses. I’d say first off inside store, gross profit dollars are relatively flat. The sales price increases are being offset by cost increases in the cost of goods. But what really jumped is the direct store operating expenses–that went up and a lot of that is labor.

Charlie McIlvaine:
When you look at the three years that on an average basket, inside store operating profit was negative 32 cents or 31 cents for 2021, 2020 and 2019. So what’s happening is our people are raising prices and trying to find cost savings to offset highly inflationary component around labor, and that is perhaps pandemic accentuated, but we do have a labor problem in the United States. It’s simple math, we’re below two baby in terms of a birth rate, which means we’re not replenishing organically. Baby boomers own three quarters of the wealth in the United States, they don’t have to work. We have a lot of 55- to 65-year-olds who have dropped out. Part of it is because they they’ve got enough money and are like this is too much of a hassle during pandemic. So it is pandemic related, but it may have pushed them into early retirement. We have a lot of people on the sidelines who are still trying to figure out elderly care, childcare, maybe there’s some predisposed health issues that prevent them from going back confidently. And we have immigration that has stalled for us. Immigration is how you fix that math problem. Labor as a bucket expense item and supply and demand are real issues for this industry. It’s an issue for everybody.

Jeff Lenard:
I was on the road for a couple days and stopped at some very well respected convenience stores. And each one was dealing with challenges in a different way. One store had a fancy new foodservice operation. They had a sign says due to a labor shortage, we don’t have enough people to make food today. Another store we went to, they’ve now they’re now charging for items I think previously were free on sandwiches. Those things were very noticeable on the road from some really good operators. How do you navigate this short term? You obviously can’t make inferior food if you don’t have people to make it. That’s the last thing you want to do, but it’s better than not making good food.

Charlie McIlvaine:
Well, we have to be creative in translating the value proposition to our guests. First off, we need to make sure it’s clear that there is a value proposition and I’m going to circle back. I’m going to throw another industry point there. People come for convenience and they definitely want to pay for convenience. That said, a lot of convenience is not like this ridiculous price differential versus other channels. In fact, oftentimes it’s below other channels. But how you present that and how you communicate that, we need to get creative in an inflationary environment and that certainly has to do with add-ons. It has to do with portion control, with combos, with working with your vendors for collaborative support. The toolkit’s pretty large. And I think you’re seeing a lot of tools coming out now that have to are necessary.

Chris Blasinsky:
In April, when we heard all of our industry data for 2021, we were looking at record inflation and record gas prices by the time everyone heard the data. The situation has gotten worse, where’s the light at the end of the tunnel here?

Charlie McIlvaine:
I think it’s important to ask that question and also say that every generation has existential challenges. You can ask your parents who lived through, WWII, Korea, Vietnam, they lived through AIDS, they lived through SARS. We have challenges. That’s what happens in humanity. So I don’t mean to be too broad stroke about it, but I think that the prospect of when you’re in the middle of it, it is harder to see what the prognosis is and what the solution is. It’s harder to see in the moment, but we have to celebrate that necessity is the mother of invention here.

Charlie McIlvaine:
We have to look and see why do you exist? Why is there a 148,000-plus outlet channel? When you take a look at what’s happened in convenience versus other channels of trade, we’re actually doing okay. Our number of locations have not decreased anything close to what some have, like I mentioned restaurants. I also think that there’s going to be a need for what we do and we have to adapt. It deals with EVs, it deals with increased consumer relevance around other offers, including food. It goes with the reality that there are some core products that have a declining demand curve associated with it, maybe a melting ice cube kind of metaphor is appropriate.

Charlie McIlvaine:
Coming back to what good looks like, we have a version of what good looks like in our industry. We need be careful to say the sky’s falling or whatever Chicken Little said. It is not easy, but there are solutions and we’re finding them and we’ll adapt. There will be some hard moments and some unfortunate moments, but I think that there’s something on the other end of this. There is no good without that. It just doesn’t exist. Does that sound a little 5:00 PM cocktail hour Friday show?

Jeff Lenard:
It sounded like a good end to this, but we can’t quite leave you yet because we are going to do trivia first. I figured since we were talking about the economy, it feels like a ‘M.A.S.H.’ unit. Which actor from the TV show was the co-founder of a convenience store chain that was once the second largest chain in the United States? Was it Wayne Rogers, Jamie Farr, Mike Farrell or was it William Christopher?

Charlie McIlvaine:
I think Hunnicutt.

Jeff Lenard:
It was Wayne Rogers. Trapper John.

Charlie McIlvaine:
But he replaced Hunnicutt, right? Yeah. Hunnicutt went home and Trapper John replaced him.

Jeff Lenard:
I think you’re right there. Wayne Rogers had the company Swifty Serve, which at its peak had more than 550 convenience stores under a variety of different names and was the second largest privately-held convenience store chain in the United States. So that’s cool.

Chris Blasinsky:
Charlie. Thank you for joining us. We certainly appreciate it. And for anybody who’s listening and wants to hear more, you can check us at conveniencematters.com and you can also subscribe to Convenience Matters on your favorite podcast player. Till next time!

Outro:
Convenience Matters is brought to you by NACS and produced in partnership with Human Factor. For more information, visit convenience.org.

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